Editor's Note

I will start this month’s note by addressing the elephant in the room: “Where is the tax guide?” Congress had just started reconvening when we went to press. As a result, I am a pushing the guide back one month in hopes of having more clarity about 2011 tax rates. However, a short article about 2010 year-end tax considerations can be found on page 27.

This month’s feature story covers international investing. Investing overseas is not without risks. It is not always easy to judge the economic trends or political climate of a foreign country. And that’s not even mentioning the direct impact currency fluctuations can have on your realized returns.

Yet the rewards of allocating a portion of your portfolio overseas can outweigh these risks. As Bernard Horn explains, foreign stocks have not historically moved in lockstep with U.S. stocks over the long term. Though there have been periods when global stocks have moved together, such as the recent bear market, correlations do not stay high for long. Bernard shows you the historical trends and explains how foreign stocks can help your portfolio starting on page 7.

Another strategy that can help your portfolio is a willingness to consider suitable investment alternatives. This is why when James Gilkeson—and fellow finance professors Gary Porter and Stanley Smith—sent me a study about the return advantage provided by certificates of deposits (CDs) relative to Treasuries, I gladly accepted their submission. They explain how a traditional bank CD can provide both safety and higher comparative yields starting on page 13.

The Federal Reserve’s intention to purchase more Treasury securities—also known as quantitative easing 2, or QE2—sparked renewed fears that inflation will be at uncomfortably high levels in the future. Even before the Fed’s announcement, however, several AAII members expressed concern that inflation and interest rates will rise. Though future levels for both are uncertain, I am providing you with information on two possible strategies for hedging against such a possibility.

The first is to use Treasury Inflation-Protected Securities TIPS. TIPS are unique Treasury bonds with principal and interest rate payments that change in response to inflation. Like any security, they are not without risks, however, as authors Daniel Wallick and Jill Marshall of the Vanguard Investment Strategy Group explain on page 17.

The second strategy is to allocate a portion of your portfolio to commodities strategy. In a study excerpted from The Journal of Investing, C. Mitchell Conover, Gerald Jensen, Robert Johnson, and Jeffrey M. Mercer explain how commodities impact a portfolio’s performance and volatility during periods of both expansive and restrictive Federal Reserve policy. Equally important, the study also provides suggestions for how much you might consider allocating to commodities. You can see their findings on page 20.

My Beginning Investor column returns this month with a discussion about active and passive strategies. An active strategy involves the selection of individual securities. A passive strategy seeks to mimic the performance of an index. You learn about the advantages and disadvantages of both on page 25.

Another returning column is CI in the Journal. If you are considering buying a new computer, be sure to read about what features AAII’s Computerized Investing editors think investors should consider. Their suggestions appear on page 26.

AAII President John Bajkowski updates his popular consensus screen for this month’s First Cut column. This strategy looks for the stocks that passed the largest number of stock screens tracked on AAII.com. A list of the 25 stocks that made the cut is presented on page 28.

Speaking of screening strategies, I worked with John to create a screen based on the scorecard presented in my recently published book, “Better Good Than Lucky” (W&A Publishing and Traders Press Inc., 2010). The scoring system evaluates how much potential risk and reward a stock has. You can see both the scorecard and how I use it to find stocks on page 29.

Finally, an index of all of the articles published in the AAII Journal during 2010 is presented on page 33.

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